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Underreaction to fundamental information and asymmetry in mispricing between bullish and bearish markets. An experimental study

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  • Kirchler, Michael
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    Abstract

    In contrast to existing literature we implement experimental asset markets with fluctuating fundamental values following a stochastic process. Therefore we can measure traders' behavior in both bullish and bearish markets. We observe underreaction of price changes to changes in fundamental value which induces overvaluation in bearish and undervaluation in bullish markets. We also find an asymmetry between markets with bullish fundamental values and those with bearish ones as the former markets show a higher degree of informational efficiency. The reason for the observed underreaction lies in the relatively large volatility of the underlying fundamental value process.

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    Bibliographic Info

    Article provided by Elsevier in its journal Journal of Economic Dynamics and Control.

    Volume (Year): 33 (2009)
    Issue (Month): 2 (February)
    Pages: 491-506

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    Handle: RePEc:eee:dyncon:v:33:y:2009:i:2:p:491-506

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    Web page: http://www.elsevier.com/locate/jedc

    Related research

    Keywords: Asset markets Bubbles Experiment Underreaction;

    References

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    Citations

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    Cited by:
    1. Li, Minqiang, 2010. "A damped diffusion framework for financial modeling and closed-form maximum likelihood estimation," Journal of Economic Dynamics and Control, Elsevier, vol. 34(2), pages 132-157, February.
    2. Thomas St?ckl & Michael Kirchler, 2010. "Trading strategies and trading profits in experimental asset markets with cumulative information," Working Papers 2010-09, Faculty of Economics and Statistics, University of Innsbruck.
    3. Joep Sonnemans & Jan Tuinstra, 2008. "Positive Expectations Feedback Experiments and Number Guessing Games as Models of Financial Markets," Tinbergen Institute Discussion Papers 08-076/1, Tinbergen Institute.
    4. Te Bao & Cars Hommes & Joep Sonnemans & Jan Tuinstra, 2012. "Individual Expectations, Limited Rationality and Aggregate Outcomes," Tinbergen Institute Discussion Papers 12-016/1, Tinbergen Institute.
    5. Bao, T. & Hommes, C.H. & Sonnemans, J. & Tuinstra, J., 2010. "Individual Expectations, Limited Rationality and Aggregate Outcomes," CeNDEF Working Papers 10-07, Universiteit van Amsterdam, Center for Nonlinear Dynamics in Economics and Finance.
    6. Kirchler, Michael, 2010. "Partial knowledge is a dangerous thing - On the value of asymmetric fundamental information in asset markets," Journal of Economic Psychology, Elsevier, vol. 31(4), pages 643-658, August.
    7. K.S. Muehlfeld & G.U. Weitzel & A. van Witteloostuijn, 2012. "Fight or freeze? Individual differences in investors’ motivational systems and trading in experimental asset markets," Working Papers 12-18, Utrecht School of Economics.

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